US stocks were up by about 1% yesterday when the minutes of the last Fed meeting came out. As Fed watchers saw the topic of paring down the Fed’s $4 trillion+ holdings of government bonds was mentioned, stocks (but not bonds) began to give back their gains and ultimately finished the day lower.

What’s this about?

The Fed typically uses the Federal Funds rate for overnight loan to loosen or tighten money policy. In doing so, it depends on the banking system to broadcast increases or declines in interest rates into the market for longer-term debt. The problem since 2008 is that the banks had destroyed their own creditworthiness through years of unsavory and unsuccessful speculative financial markets trading. So they were ineffective in performing this crucial rate-determining role. Congress and the administration were–and still remain–lost in their inside-the-Beltway alternative universe, so there was no hope of help for the failing economy from that source. The Fed’s solution was to begin “unconventional” operations, by buying huge amounts of longer-dated government debt in order to push down long-term interest rates itself. It now holds something like $4.3 trillion worth of Treasury and government agency debt.

The Fed has long since stopped making new net purchases of longer-dated bonds. But as its existing bonds mature, it has continued to roll over the money it gets from them into new bond purchases. The next step for the Fed in normalizing the long-term debt market will be to stop this rollover. The consensus is that this change will happen later this year or early next.

What’s “new” from yesterday is that the Fed put this thought down in writing, without specifying any details.

My take: while the Fed announcement may have been the trigger for an intra-day selloff in stocks, the Fed minutes are not a big deal. There is an investment issue as to how the Fed will proceed, but that will ultimately be influenced by how capable Mr. Trump will be to get Washington working again.

The President’s early performance has had two consequences: US investors are beginning to think about shifting money to Europe. Despite Brexit, that region is beginning to experience its own economic growth. As well, it is having deep second thoughts about electing Trump-like figures in their own countries (we’ll learn more in the first round of the French elections on April 23rd), thereby increasing their attractiveness as an investment destination.